Question

QUESTION 6 Calculate Weighted Average Cost of Capital using a corporate tax rate of 35% • Debt Number of bonds outstanding - 10,000 price per bond 51,165 o par value per bond - $1,000 o coupon rate=6% (paid annually) • Years to maturity - 10 • Common Stock Number of shares outstanding - 1,000,000 o Price per share - $25 o Book value per share - $15 O Beta-1.4 O Risk free rate 4.5% • Market risk premium - 5% a. 7.93% b. 8.49% OO c. 9.11% d. 9.42% OO e. 8.6696 CLICCTION 7 Click Save and Submit to save and submit. Click Save All Answers to save all answers.

Answer 1

Calculation of Cost of Debt (Kd)

Kd = Interest Rate*(1- Tax)

Kd = 6% *(1-35%)

Kd = 3.9%

Calculation of Cost of Equity (Ke)

As per Capital Asset Pricing model (CAPM) = Risk free rate + Market Risk Premium*Beta

Ke = 4.5% + 5%*1.4

Ke = 11.5%

Weighted average Cost of Capital (WACC)

WACC = Weight of Debt * Cost of Debt + Weight of Equity * Cost of Equity

WACC = (10,000,000 / 25,000,000) * 3.9% + (15,000,000 / 25,000,000) *11.5%

WACC = 0.4 * 3.9% + 0.6*11.5%

WACC = 1.56% + 6.9%

WACC= 8.46%